bsm-10q_20160331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _______________ to _______________

Commission File Number: 001-37362

 

Black Stone Minerals, L.P.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-1846692

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1001 Fannin Street, Suite 2020

Houston, Texas

 

77002

(Address of principal executive offices)

 

(Zip code)

(713) 445-3200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

 

Accelerated filer

¨

 

 

 

 

 

Non-accelerated filer

þ

(Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

As of May 6, 2016, there were 96,531,540 common limited partner units, 95,189,076 subordinated limited partner units, and 52,691 preferred units of the registrant outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

1

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

2

 

 

 

 

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2016

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4.

 

Controls and Procedures

25

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

27

 

 

 

 

Item 1A.

 

Risk Factors

27

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

Item 6.

 

Exhibits

28

 

 

 

 

 

 

Signatures

29

 

 

 

ii


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BLACK STONE MINERALS, L.P.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

March 31, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,013

 

 

$

13,233

 

Accounts receivable

 

 

44,370

 

 

 

41,246

 

Commodity derivative assets

 

 

46,851

 

 

 

48,260

 

Prepaid expenses and other current assets

 

 

1,052

 

 

 

856

 

TOTAL CURRENT ASSETS

 

 

97,286

 

 

 

103,595

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

 

Oil and natural gas properties, at cost, using the successful efforts method of accounting, includes unproved properties of $530,580 and $524,563 at March 31, 2016 and December 31, 2015, respectively

 

 

2,509,472

 

 

 

2,482,211

 

Accumulated depreciation, depletion, amortization, and impairment

 

 

(1,571,587

)

 

 

(1,543,796

)

Oil and natural gas properties, net

 

 

937,885

 

 

 

938,415

 

Other property and equipment, net of accumulated depreciation of $14,676 and $14,660 at March 31, 2016 and December 31, 2015, respectively

 

 

168

 

 

 

179

 

NET PROPERTY AND EQUIPMENT

 

 

938,053

 

 

 

938,594

 

DEFERRED CHARGES AND OTHER LONG-TERM ASSETS

 

 

10,504

 

 

 

19,247

 

TOTAL ASSETS

 

$

1,045,843

 

 

$

1,061,436

 

LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,127

 

 

$

5,036

 

Accrued liabilities

 

 

48,789

 

 

 

58,003

 

TOTAL CURRENT LIABILITIES

 

 

52,916

 

 

 

63,039

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Credit facility

 

 

116,000

 

 

 

66,000

 

Accrued incentive compensation

 

 

3,849

 

 

 

7,902

 

Deferred revenue

 

 

3,054

 

 

 

3,257

 

Asset retirement obligations

 

 

10,972

 

 

 

10,585

 

TOTAL LIABILITIES

 

 

186,791

 

 

 

150,783

 

COMMITMENTS AND CONTINGENCIES (Note 7)

 

 

 

 

 

 

 

 

MEZZANINE EQUITY

 

 

 

 

 

 

 

 

Partners' equity - redeemable preferred units, 53 and 77 units outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

54,001

 

 

 

79,162

 

EQUITY

 

 

 

 

 

 

 

 

Partners' equity - general partner interest

 

 

 

 

 

Partners' equity - common units, 96,861 and 96,162 units outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

561,860

 

 

 

574,648

 

Partners' equity - subordinated units, 95,189 and 95,057 units outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

242,078

 

 

 

255,699

 

Noncontrolling interests

 

 

1,113

 

 

 

1,144

 

TOTAL EQUITY

 

 

805,051

 

 

 

831,491

 

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY

 

$

1,045,843

 

 

$

1,061,436

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

REVENUE

 

 

 

 

 

 

 

 

Oil and condensate sales

 

$

27,248

 

 

$

36,163

 

Natural gas and natural gas liquids sales

 

 

25,112

 

 

 

31,640

 

Gain on commodity derivative instruments

 

 

10,626

 

 

 

19,647

 

Lease bonus and other income

 

 

1,395

 

 

 

3,611

 

TOTAL REVENUE

 

 

64,381

 

 

 

91,061

 

OPERATING (INCOME) EXPENSE

 

 

 

 

 

 

 

 

Lease operating expense

 

 

4,889

 

 

 

6,133

 

Production costs and ad valorem taxes

 

 

7,062

 

 

 

8,256

 

Exploration expense

 

 

8

 

 

 

39

 

Depreciation, depletion and amortization

 

 

21,721

 

 

 

27,891

 

Impairment of oil and natural gas properties

 

 

6,096

 

 

 

13,467

 

General and administrative

 

 

17,401

 

 

 

14,818

 

Accretion of asset retirement obligations

 

 

274

 

 

 

271

 

Gain on sale of assets, net

 

 

(4,680

)

 

 

(7

)

TOTAL OPERATING EXPENSE

 

 

52,771

 

 

 

70,868

 

INCOME FROM OPERATIONS

 

 

11,610

 

 

 

20,193

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest and investment income

 

 

153

 

 

 

1

 

Interest expense

 

 

(1,048

)

 

 

(2,945

)

Other income

 

 

34

 

 

 

50

 

TOTAL OTHER EXPENSE

 

 

(861

)

 

 

(2,894

)

NET INCOME

 

 

10,749

 

 

 

17,299

 

NET INCOME ATTRIBUTABLE TO PREDECESSOR

 

 

 

 

 

(17,299

)

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

 

(2

)

 

 

 

DISTRIBUTIONS ON REDEEMABLE PREFERRED UNITS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

 

(1,804

)

 

 

 

NET INCOME ATTRIBUTABLE TO THE GENERAL PARTNER AND COMMON AND SUBORDINATED UNITS SUBSEQUENT TO INITIAL PUBLIC OFFERING

 

$

8,943

 

 

$

 

ALLOCATION OF NET INCOME SUBSEQUENT TO INITIAL PUBLIC OFFERING ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

General partner interest

 

$

 

 

 

 

 

Common units

 

 

8,320

 

 

 

 

 

Subordinated units

 

 

623

 

 

 

 

 

 

 

$

8,943

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO LIMITED PARTNERS PER COMMON AND SUBORDINATED UNIT:

 

 

 

 

 

 

 

 

Per common unit (basic)

 

$

0.09

 

 

 

 

 

Weighted average common units outstanding (basic)

 

 

96,484

 

 

 

 

 

Per subordinated unit (basic)

 

$

0.01

 

 

 

 

 

Weighted average subordinated units outstanding (basic)

 

 

94,995

 

 

 

 

 

Per common unit (diluted)

 

$

0.09

 

 

 

 

 

Weighted average common units outstanding (diluted)

 

 

96,752

 

 

 

 

 

Per subordinated unit (diluted)

 

$

0.01

 

 

 

 

 

Weighted average subordinated units outstanding (diluted)

 

 

94,995

 

 

 

 

 

DISTRIBUTIONS DECLARED AND PAID SUBSEQUENT TO INITIAL PUBLIC OFFERING:

 

 

 

 

 

 

 

 

Per common unit

 

$

0.2625

 

 

 

 

 

Per subordinated unit

 

$

0.18375

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(In thousands)

 

 

 

Common

units

 

 

Subordinated

units

 

 

Partners'

equity—

common

units

 

 

Partners'

equity—

subordinated

units

 

 

Noncontrolling

interests

 

 

Total

equity

 

BALANCE AT DECEMBER 31, 2015

 

 

96,162

 

 

 

95,057

 

 

$

574,648

 

 

$

255,699

 

 

$

1,144

 

 

$

831,491

 

Restricted units granted, net of forfeitures

 

 

754

 

 

 

(38

)

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

5,324

 

 

 

576

 

 

 

 

 

 

5,900

 

Conversion of redeemable preferred units

 

 

184

 

 

 

241

 

 

 

2,625

 

 

 

3,439

 

 

 

 

 

 

6,064

 

Repurchases of common and subordinated units

 

 

(239

)

 

 

(71

)

 

 

(3,393

)

 

 

(808

)

 

 

 

 

 

(4,201

)

Distributions

 

 

 

 

 

 

 

 

(25,413

)

 

 

(17,451

)

 

 

(33

)

 

 

(42,897

)

Charges to partners' equity for accrued distribution equivalent rights

 

 

 

 

 

 

 

 

(251

)

 

 

 

 

 

 

 

 

(251

)

Net income

 

 

 

 

 

 

 

 

9,229

 

 

 

1,518

 

 

 

2

 

 

 

10,749

 

Distributions on redeemable preferred units

 

 

 

 

 

 

 

 

(909

)

 

 

(895

)

 

 

 

 

 

(1,804

)

BALANCE AT MARCH 31, 2016

 

 

96,861

 

 

 

95,189

 

 

$

561,860

 

 

$

242,078

 

 

$

1,113

 

 

$

805,051

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

BLACK STONE MINERALS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

10,749

 

 

$

17,299

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization

 

 

21,721

 

 

 

27,891

 

Impairment of oil and natural gas properties

 

 

6,096

 

 

 

13,467

 

Accretion of asset retirement obligations

 

 

274

 

 

 

271

 

Amortization of deferred charges

 

 

197

 

 

 

241

 

Gain on commodity derivative instruments

 

 

(10,626

)

 

 

(19,647

)

Net cash received on settlement of commodity derivative instruments

 

 

20,581

 

 

 

17,450

 

Equity-based compensation

 

 

5,900

 

 

 

1,243

 

Gain on sale of assets, net

 

 

(4,680

)

 

 

(7

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,039

)

 

 

23,298

 

Prepaid expenses and other current assets

 

 

(196

)

 

 

(365

)

Accounts payable and accrued liabilities

 

 

(20,814

)

 

 

(6,620

)

Deferred revenue

 

 

(203

)

 

 

(104

)

Settlement of asset retirement obligations

 

 

(54

)

 

 

(58

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

25,906

 

 

 

74,359

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

 

(25,110

)

 

 

(13,612

)

Purchase of other property and equipment

 

 

(5

)

 

 

 

Proceeds from the sale of oil and natural gas properties

 

 

33

 

 

 

406

 

Acquisitions of oil and natural gas properties

 

 

(10,000

)

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(35,082

)

 

 

(13,206

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Payments related to initial public offering costs

 

 

 

 

 

(1,620

)

Borrowings under senior line of credit

 

 

61,000

 

 

 

34,000

 

Repayments of borrowings under senior line of credit

 

 

(11,000

)

 

 

(39,000

)

Distributions to Predecessor unitholders

 

 

 

 

 

(56,431

)

Distributions to Black Stone Minerals, L.P. common and subordinated unitholders

 

 

(42,864

)

 

 

 

Distributions to preferred unitholders

 

 

(1,946

)

 

 

(3,962

)

Distributions to noncontrolling interests

 

 

(33

)

 

 

(52

)

Repurchases of common and subordinated units

 

 

(4,201

)

 

 

(523

)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

956

 

 

 

(67,588

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(8,220

)

 

 

(6,435

)

CASH AND CASH EQUIVALENTS - beginning of the period

 

 

13,233

 

 

 

14,803

 

CASH AND CASH EQUIVALENTS - end of the period

 

$

5,013

 

 

$

8,368

 

SUPPLEMENTAL DISCLOSURE

 

 

 

 

 

 

 

 

Interest paid

 

$

829

 

 

$

2,664

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Black Stone Minerals, L.P. (“BSM” or the “Partnership”) is a publicly traded Delaware limited partnership formed on September 16, 2014. On May 6, 2015, BSM completed its initial public offering (the “IPO”) of 22,500,000 common units representing limited partner interests at a price to the public of $19.00 per common unit. BSM received proceeds of $391.5 million from the sale of its common units, net of underwriting discount, structuring fee, and offering expenses (including costs previously incurred and capitalized). BSM used the net proceeds from the IPO to repay substantially all indebtedness outstanding under its credit facility. On May 1, 2015, BSM’s common units began trading on the New York Stock Exchange under the symbol “BSM.”

Black Stone Minerals Company, L.P., a Delaware limited partnership, and its subsidiaries (collectively referred to as “BSMC” or the “Predecessor”) own oil and natural gas mineral interests in the United States. In connection with the IPO, BSMC was merged into a wholly owned subsidiary of BSM, with BSMC as the surviving entity. Pursuant to the merger, the Class A and Class B common units representing limited partner interests of the Predecessor were converted into an aggregate of 72,574,715 common units and 95,057,312 subordinated units of BSM at a conversion ratio of 12.9465:1 for 0.4329 common units and 0.5671 subordinated units, and the preferred units of BSMC were converted into an aggregate of 117,963 preferred units of BSM at a conversion ratio of one to one. The merger is accounted for as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests. Unless otherwise stated or the context otherwise indicates, all references to the “Partnership” or similar expressions for time periods prior to the IPO refer to Black Stone Minerals Company, L.P. and its subsidiaries, the Predecessor, for accounting purposes. For time periods subsequent to the IPO, these terms refer to Black Stone Minerals, L.P. and its subsidiaries.

In addition to mineral interests, which make up the vast majority of the asset base, the Partnership’s assets also include nonparticipating and overriding royalty interests. All of these interests are non-cost-bearing and are collectively referred to as “mineral and royalty interests.” As of March 31, 2016, the Partnership’s mineral and royalty interests were located in most of the major onshore oil and natural gas producing basins spread across 41 states and 61 onshore oil and natural gas producing basins of the continental United States. The Partnership also owns non-operated working interests in certain oil and natural gas properties.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Partnership have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Partnership’s consolidated financial statements for the year ended December 31, 2015, which are included in the Partnership’s 2015 Annual Report on Form 10-K. The financial statements include the consolidated results of the Partnership. All intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to the prior periods presented to conform to the current period financial statement presentation. The reclassifications have no effect on the consolidated financial position, results of operations, or cash flows of the Partnership. In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for the periods presented have been reflected. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year.

The Partnership evaluates the significant terms of its investments to determine the method of accounting to be applied to each respective investment. Investments in which the Partnership has less than a 20% ownership interest and does not have control or exercise significant influence are accounted for under the cost method. The Partnership’s cost method investment is included in deferred charges and other long-term assets in the consolidated balance sheets. Investments in which the Partnership exercises control are consolidated, and the noncontrolling interests of such investments, which are not attributable directly or indirectly to the Partnership, are presented as a separate component of net income and equity in the accompanying consolidated financial statements.

The consolidated financial statements include undivided interests in oil and natural gas property rights. The Partnership accounts for its share of oil and natural gas property rights by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the accompanying consolidated balance sheets, statements of operations, and statements of cash flows.

Segment reporting: The Partnership operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Partnership’s chief executive officer has been determined to be the chief operating decision maker and allocates resources and assesses performance based upon financial information at the consolidated level.

5


 

 

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: Our significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the years ended December 31, 2015, 2014, and 2013 included in the Partnership’s 2015 Annual Report on Form 10-K. There have been no changes in such policies or the application of such policies during the three months ended March 31, 2016.

New accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new accounting guidance creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation, and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. In July 2015, the FASB decided to defer the original effective date by one year to be effective for annual reporting periods beginning after December 15, 2017 instead of December 15, 2016 for public entities. The Partnership is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures and has not yet determined the method by which it will adopt the standard.

In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize the lease assets and lease liabilities classified as operating leases on the balance sheet. The amendment will be effective for reporting periods beginning on or after December 15, 2018, and early adoption is permitted. The Partnership is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent put and call options in debt instruments, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendment will be effective prospectively for reporting periods beginning on or after December 31, 2016, and early adoption is permitted. The Partnership does not expect that the impact of adopting this guidance will be material to the Partnership’s consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation guidance on principal versus agent considerations. The amendment will be effective prospectively for reporting periods beginning on or after December 31, 2017, and early adoption is not permitted. The Partnership is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to employee share-based payment accounting, which includes provisions intended to simplify various aspects related to how share-based compensation payments are accounted for and presented in the financial statements. This amendment will be effective prospectively for reporting periods beginning on or after December 15, 2016, and early adoption is permitted. The Partnership is evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

 

 

6


 

NOTE 3—ASSET RETIREMENT OBLIGATIONS

The asset retirement obligation (“ARO”) liability reflects the present value of estimated costs of dismantlement, removal, site reclamation, and similar activities associated with the Partnership’s working-interest oil and natural gas properties. The Partnership utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. The Partnership estimates the ultimate productive life of its properties, a risk-adjusted discount rate, and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and natural gas property balance. The following table describes changes to the Partnership’s ARO liability during the period:

 

 

For the three months ended

 

 

March 31, 2016

 

 

(In thousands)

 

Beginning asset retirement obligations

$

10,585

 

Liabilities incurred

 

167

 

Liabilities settled

 

(54

)

Accretion expense

 

274

 

Ending asset retirement obligations

$

10,972

 

 

 

NOTE 4—DERIVATIVES AND FINANCIAL INSTRUMENTS

The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses derivative instruments. From time to time, such instruments may include fixed-price-swap contracts, fixed price contracts, costless collars, and other contractual arrangements. The Partnership does not enter into derivative instruments for speculative purposes.

As of March 31, 2016, the Partnership’s open derivative contracts only consisted of fixed-price-swap contracts. A fixed-price-swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. The Partnership will receive from, or pay to, the counterparty the difference between the fixed-swap price and the market price on the settlement date. We have not designated any of our contracts as fair value or cash flow hedges. Accordingly, the changes in fair value of the contracts are included in net income in the period of the change. All derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015. See Note 5 – Fair Value Measurement for further discussion.

The table below summarizes the fair value and classification of the Partnership’s derivative instruments:

 

As of March 31, 2016

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

48,415

 

 

$

(1,564

)

 

$

46,851

 

Long-term asset

 

Deferred charges and other

long-term assets

 

 

7,728

 

 

 

 

 

 

7,728

 

Total assets

 

 

 

$

56,143

 

 

$

(1,564

)

 

$

54,579

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liabilities

 

$

1,564

 

 

$

(1,564

)

 

$

 

Long-term liability

 

Commodity derivative liabilities

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

$

1,564

 

 

$

(1,564

)

 

$

 

7


 

 

As of December 31, 2015

 

Classification

 

Balance Sheet Location

 

Gross Fair

Value

 

 

Effect of

Counterparty

Netting

 

 

Net Carrying

Value on

Balance Sheet

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current asset

 

Commodity derivative assets

 

$

48,260

 

 

$

 

 

$

48,260

 

Long-term asset

 

Deferred charges and other

long-term assets

 

 

16,274

 

 

 

 

 

 

16,274

 

Total assets

 

 

 

$

64,534

 

 

$

 

 

$

64,534

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liability

 

Commodity derivative liabilities

 

$

 

 

$

 

 

$

 

Long-term liability

 

Commodity derivative liabilities

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

$

 

 

$

 

 

$

 

Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations. Changes in the fair value of the Partnership’s commodity derivative instruments (both assets and liabilities) are as follows:

 

 

 

For the three months ended March 31,

 

Derivatives not designated as hedging instruments

 

2016

 

 

2015

 

 

 

(In thousands)

 

Beginning fair value of commodity derivative instruments

 

$

64,534

 

 

$

37,471

 

Gain on oil derivative instruments

 

 

2,926

 

 

 

13,019

 

Gain on natural gas derivative instruments

 

 

7,700

 

 

 

6,628

 

Net cash received on settlements of oil derivative

   instruments

 

 

(12,572

)

 

 

(11,509

)

Net cash received on settlements of natural gas

   derivative instruments

 

 

(8,009

)

 

 

(5,941

)

Net change in fair value of commodity derivative

   instruments

 

 

(9,955

)

 

 

2,197

 

Ending fair value of commodity derivative instruments

 

$

54,579

 

 

$

39,668

 

 

The Partnership had the following open derivative contracts for oil as of March 31, 2016:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per Bbl)

 

Period and Type of Contract

 

(Bbl)

 

 

(Per Bbl)

 

 

Low

 

 

High

 

Oil Swap Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2016

 

 

193,000

 

 

$

52.47

 

 

$

29.07

 

 

$

61.34

 

Q2 2016

 

 

536,000

 

 

 

53.57

 

 

 

31.25

 

 

 

61.96

 

Q3 2016

 

 

489,000

 

 

 

55.30

 

 

 

34.41

 

 

 

62.53

 

Q4 2016

 

 

448,000

 

 

 

56.92

 

 

 

36.31

 

 

 

63.07

 

FY 2017

 

 

703,000

 

 

 

58.50

 

 

 

52.73

 

 

 

63.65

 

 The Partnership had the following open derivative contracts for natural gas as of March 31, 2016:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per MMBtu)

 

Period and Type of Contract

 

(MMBtu)

 

 

(Per MMBtu)

 

 

Low

 

 

High

 

Natural Gas Swap Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q2 2016

 

 

7,210,000

 

 

$

2.94

 

 

$

2.03

 

 

$

3.14

 

Q3 2016

 

 

6,610,000

 

 

 

3.02

 

 

 

2.23

 

 

 

3.17

 

Q4 2016

 

 

5,950,000

 

 

 

3.17

 

 

 

2.29

 

 

 

3.41

 

FY 2017

 

 

9,650,000

 

 

 

3.33

 

 

 

3.14

 

 

 

3.52

 

 

8


 

The Partnership entered into the following derivative contracts for oil subsequent to March 31, 2016:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per Bbl)

 

Period and Type of Contract

 

(Bbl)

 

 

(Per Bbl)

 

 

Low

 

 

High

 

Oil Swap Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q2 2016

 

 

22,000

 

 

$

44.31

 

 

$

43.87

 

 

$

44.68

 

Q3 2016

 

 

36,000

 

 

 

45.46

 

 

 

45.03

 

 

 

46.16

 

Q4 2016

 

 

30,000

 

 

 

46.36

 

 

 

45.87

 

 

 

47.09

 

The Partnership entered into the following derivative contracts for natural gas subsequent to March 31, 2016:

 

 

 

Volume

 

 

Weighted Average

 

 

Range (Per MMBtu)

 

Period and Type of Contract

 

(MMBtu)

 

 

(Per MMBtu)

 

 

Low

 

 

High

 

Natural Gas Swap Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q2 2016

 

 

380,000

 

 

$

2.12

 

 

$

2.05

 

 

$

2.18

 

Q3 2016

 

 

710,000

 

 

 

2.33

 

 

 

2.26

 

 

 

2.40

 

Q4 2016

 

 

620,000

 

 

 

2.63

 

 

 

2.41

 

 

 

2.90

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 5—FAIR VALUE MEASUREMENT

Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820 establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Partnership’s own assumptions in determining fair value).

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the three months ended March 31, 2016 or the year ended December 31, 2015.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Partnership estimated the fair value of derivative instruments using the market approach via a model that uses inputs that are observable in the market or can be derived from, or corroborated by, observable data. See Note 4 – Derivatives and Financial Instruments for further discussion.

9


 

The following table presents information about the Partnership’s assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements Using

 

 

Effect of

Counterparty

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Netting

 

 

Total

 

 

 

(In thousands)

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

$

 

 

$

56,143

 

 

$

 

 

$

(1,564

)

 

$

54,579

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative instruments

 

 

 

 

 

1,564

 

 

 

 

 

 

(1,564

)

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets